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3 Ways to Add Debt to Your Portfolio 💰


The prevailing conundrum amidst the country lately has been to look for the best way to preserve the value of one’s money and grow it.


Until the pandemic, equities would’ve been a no-brainer, but the Nifty 50 has virtually been at a standstill if you take where the index was at the same time last year - becoming a problem for investors who aren’t finance bros.


Enter the 4 letter word that instils fear in the hearts of the middle class - debt. The first idea that comes to mind would be the legendary Fixed Deposit, giving those not-so-fun returns, although your neighbour uncle might swear by it.


One must wonder how you can get that necessary debt exposure, especially when interest rates are on the rise. Rupeeting has got your back with these 3 ways. Sneak peek time.


1. Debt Mutual Funds

These are mutual funds which invest in varied proportions of Government and Corporate debt instruments like bonds and debentures.

The funds have varying maturities in which you can invest in them:

  • Liquid Funds: 3 months

  • Ultra-Short Term Funds: 3-6 months

  • Short Term Funds: 9 months - 1 year

  • Medium Term Funds: 3 years

  • Long Term Funds: 5 years or more

They can switch strategies (corporate to government and vice-versa) or even play with the maturity or credit ratings of the bonds depending on what the fund manager’s view on the market is. In short, leave it to the experts!


2. Creating Your Own Bond Portfolio

At one point in the near past, this would’ve been seemingly impossible to a retail investor, due to inaccessibility, ticket sizes being too high and a general lack of awareness about these products.

Luckily, the Government, in collaboration with the RBI has made this a reality for the public. This can be done in namely two formats:


Tax-Free Bonds

  • These are bonds issued by Government-backed PSUs like the National Highway Association of India, National Thermal Power Corporation, Indian Railway Finance Corp, and the like.

  • They are usually longer-term bonds of 5 years or longer in maturity

  • These can be bought using your Demat account

  • If you hold these till maturity, the interest income will be tax-free!

RBI Retail Direct

  • This is an initiative started by the RBI in 2021 which allows retail investors to open an account on their portal, and make bids for Government securities directly, like that done in an IPO

  • These have maturities ranging from 3 months (Treasury Bills) to 8 years (Sovereign Gold Bonds)

These are for investors who can cough up a little more savings and benefit from the direct exposure to debt instruments, along with their taxation benefits!


3. Alternative Debt Assets

Since this seems like a vague term, let’s take an example of a famous startup that has pioneered its own alternative debt asset in India, and has taken over our social media and youtube ads - Wint Wealth.


Basically, they do extensive research on corporate bond issues, see if the company is sound enough and providing fair returns and can cover a default with ample collateral, and proceed to buy the entire issue out.


Then, they sell it to retail investors at much smaller units, making corporate bond investments accessible to the public who can’t sell out Rs. 5 lakh for a single bond.


The bonds’ maturity here depends on what they offer - from 1 year to 3 years, as they intend to sell medium term, to limit the lock-in period.


What’s the Best Way?

Now that we’ve set the scene, it’s time to get to the climax - what do they offer, what are the risks and which seems like a better option to which investor:


Factors

Debt Mutual Funds

Curating Your Own Bond Portfolio

Alternative Debt Assets

Liquidity

Highest as buyers/sellers always available on stock exchange

Lower as option to sell on stock exchange exists, yet finding a buyer is tough

Lowest as they provide unlisted bonds as well, which cannot be sold on stock exchange

Minimum Investment

Rs. 500

Rs. 10,000

Rs. 10,000

Returns

7-9% p.a.

6-8% p.a.

9-11% p.a.

Credit Risk

Lower as fund has a mix of government and corporate bonds

Variable as if you only make a portfolio of government bonds, credit risk will be very low. However, if you add some low-rated bonds, you will end up with higher credit risk.

Highest as corporate can default, leaving investor with no principal amount

Concentration Risk

Lowest as fund is diversified across multiple forms of debt

Lower as there is a mix of tax-free bonds and Government securities, yet both are Government-backed

Highest as only 1-2 unlisted bonds available at one time



How To Debt?

From the above, the clear winner seems to be good old debt mutual funds, with bond portfolios and alternative assets coming in on a close second. Although debt mutual funds might have average returns in comparison, their risk mitigation and sheer availability and option to exit make them victorious.

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